CNN
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Many Americans would like to buy a home, but they don’t have tens of thousands of dollars to cover a down payment.
That major hurdle is being removed thanks to a new zero-percent mortgage program launched two weeks ago by one of the nation’s largest mortgage lenders.
However, the new program, offered by United Wholesale Mortgage, has some experts nervous about how these loans could backfire on homeowners, especially if housing prices stop soaring. And for some, it brings back bad memories of the subprime mortgage collapse that fueled the 2008 financial crisis.
UWM, led by Mat Ishbia, the billionaire owner of the Phoenix Suns NBA team, said eligible home buyers will not need to make an initial down payment.
Christian Petersen/Getty Images
Phoenix Suns owner Mat Ishbia watches the first half of the NBA game against the Oklahoma City Thunder at Footprint Center on March 8, 2023 in Phoenix, Arizona.
Instead, the program will allow buyers to pay 97% of the home’s value with a first mortgage, then provide the remaining 3% (up to $15,000) in the form of a second mortgage.
This second mortgage will not accrue interest, but it will need to be repaid – in full as a lump sum payment – when the home is sold, the mortgage is paid off, or the homeowner refinances.
“The demand has been enormous”
These mortgages are only open to first-time home buyers and those who earn no more than 80% of the area median income.
“The initial demand was huge. We’ve already submitted a few thousand loans,” Alex Elezaj, UWM’s chief strategy officer, told CNN.
UWM said no other wholesale lender or nonbank mortgage company offers such a program nationwide. (UWM is a wholesale lender that connects homebuyers and real estate agents with mortgage brokers through its Mortgage Matchup platform. Earlier this month, Mortgage Matchup was named the first-ever mortgage partner of the NBA and the WNBA.)
Still, some worry that this type of mortgage could cause problems for homeowners in the long run.
The main risk is that because they haven’t made a deposit up front, homeowners will start with no equity.
That means they would instantly find themselves underwater (owing more than the house is worth) if the hot real estate market suddenly cools and home values drop.
This could pose a problem if the owner needs to sell quickly, perhaps because they lose their job, face financial difficulties, or need to move.
Suddenly they would be forced to pay off that second mortgage. And since they’re underwater, selling the house won’t generate enough cash to pay off the debt.
“If the homeowner does not have the cash flow to make up the difference, then they will default on their second mortgage and risk foreclosure and damaged credit,” said Patricia McCoy, a professor at Boston College Law School.
This scenario is “exactly what happened during the subprime crisis, when millions of homeowners were underwater on their mortgages and found themselves in default,” said McCoy, a former mortgage regulator at the Bureau of Consumer Financial Protection (CFPB). “It’s happened before and it could happen again.”
The housing bubble that burst around 2006 was fueled in part by an explosion in lending to subprime borrowers. In the years before the bubble, lenders offered new products like adjustable-rate mortgages and no-down-payment loans that ended up booming when housing prices finally collapsed.
Certainly, the real estate market is currently on fire. Home prices are at record highs and demand is so strong that some homes are selling above asking price after all-cash bidding wars.
However, another potential problem is that homeowners could find themselves stuck in high mortgage rates if the Federal Reserve begins to cut interest rates.
In fact, to refinance at a lower rate, the owner would have to fully repay their second mortgage. And they may not have enough money to do it.
They could also end up with higher rates because lenders won’t let the borrower refinance if they haven’t built enough equity in the home.
There are other options for no down payment mortgages. For example, Bank of America launched a no-down mortgage program in 2022 for first-time homebuyers in certain Black and Hispanic neighborhoods.
As Bankrate notes, there are also no-down home loans guaranteed by the U.S. Department of Agriculture (USDA) in rural areas, as well as loans for veterans and surviving spouses guaranteed by the U.S. Department of Agriculture (USDA). Veterans Affairs (VA).
Anneliese Lederer, senior policy advisor at the Center for Responsible Lending, said it is crucial for homeowners considering the UWM loan program to be informed of the terms and conditions.
“Using funny lines like “no money down” sounds exciting and great. But you have to read the fine print,” Lederer said. “This could be a fantastic product to enable people who can afford their mortgage but don’t have the down payment to access homeownership. But the question is: how do you pay off that second mortgage? What is the plan? As of now, there are no plans. »
Dennis Kelleher, CEO of Better Markets, a nonprofit organization that advocates for stricter financial regulation, told CNN he was concerned that a mortgage product like this could hurt some borrowers if the real estate market was stumbling.
“These mortgages will be ticking time bombs – just like subprime mortgages – unless house prices continue to rise very substantially,” Kelleher said. “This could turn the American dream of homeownership into a nightmare almost immediately. »
Kelleher stressed that although housing prices are currently rising sharply, there is no guarantee that this will continue.
Existing home prices jumped another 6% last month year-over-year to $407,600 – the highest median price on record in April.
“We don’t know if we’re in a bubble that’s going to burst or if the trend lines are going to get steeper,” Kelleher said. “But offering 100% mortgage products to low-income people while house prices are at historic highs should worry everyone.”
Jonathan Adams, an assistant professor at Saint Joseph’s University teaching real estate finance, said the UWM loan program has “all the characteristics that made subprime bad.”
UWM pushed back on those concerns, emphasizing that borrowers must still adhere to strict underwriting guidelines.
“People making these claims are not informed about the current state of the industry,” said Elezaj, the UWM director. “In the current environment, UWM is responsible for underwriting the loan, which gives us confidence that these are high quality loans. »
“It’s a huge positive. This helps consumers and is a big win across the board,” Elezaj said. “Think of all the people who are renters and would like to buy a house, but who are faced with this obstacle: having to put down $10,000 or $15,000 for a down payment. This eliminates that.
It should also be noted that some Experts say lending standards have improved significantly since the 2008 financial crisis.
The days of NINJA (no income, no job, no assets) loans and adjustable rate mortgages are largely over.
“We’re not going back to 2006 here,” said Greg McBride, chief financial analyst at Bankrate. “Lending standards are light years ahead of what they were before the crisis, when there were often no standards at all. »
Still, Adams, a former Wall Street analyst, warned that someone who can’t make a down payment and earns less than 80 percent of the median income (those who qualify for this loan program) is likely to suffer more in an economy when housing prices are high. are falling.
“One of the lessons of the subprime crisis,” Adams said, “is that you do borrowers a disservice by making borrowing too easy.”